Fundamental Analysis

Dollar Under Pressure after Trump's Tweet on N. Korea; Pound Weaker Despite May Rejecting Options of Leaving EU Earlier

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The latest war of words between Trump and the North Korean leader Kim Jong Un kept markets nervous during the European session, with the dollar being unable to restore Wednesday's gains when the FOMC statement signaled the start of the balance sheet reduction in October and more strongly put on the table an additional rate hike later in the year. However, the Brexit speech by the UK Prime Minister Theresa May was in the spotlight during the European session with the pound sinking during the first minutes of the speech as sources reported that May would raise the odds for Britain leaving the EU before the determined date.

After the North Korean leader, Kim Jong Un, expressed his intention early on Friday to use "the highest level of hard-line countermeasure in history against the US", Trump responded with a strong language through social media, commenting that the North Korean leader "would be tested like never before". This escalated geopolitical tensions even further, with investors turning to safer-perceived investments.

Despite the dollar index being pressured during the day, it managed to edge up to 91.84 from an intra-day low of 91.54 touched earlier in the session after the San Francisco Fed President John Williams (a non-voting FOMC member) said that the economy is in a strong shape as it is close to its unemployment and inflation goals as has never been before. Though he added that interest rates would be easily reduced in case of negative economic shocks.

Dollar/yen was down by 0.54% on the day at 111.88 amid heightened geopolitical uncertainties while dollar/swissie fell by 0.24% to 0.9683.

Gold gained 0.50% on Friday, jumping to $1,297.40 per ounce.

The September Markit flash estimate of US manufacturing PMI was released in line with expectations at the two-month high of 53.0. The figure for August stood at 52.8. The respective number for the services sector came in at the two-month low of 55.1, below analysts' forecasts for a reading of 55.9, as well as below August's 56.0. Both readings remained in expansion territory above 50.0, showing "encouraging resilience in a month of hurricane disruption" according to IHS Markit Chief economist Chris Williamson. He added that "the surveys point to the economy growing at an annualized rate of just over 2% in the third quarter". The September flash composite PMI, which blends both the services and manufacturing sectors retreated to 54.6 in September from August's 55.3. Dollar/yen declined, though not by much, as the data went public.

The euro jumped to $1.2002 following Eurozone's upbeat flash PMI readings for the month of September but tumbled back to $1.1960 after the dovish remarks by the ECB Chief Mario Draghi.

The Eurozone IHS Markit composite PMI surprisingly bounced back to a multi-year high of 56.7, surpassing the 55.5 that was expected. The manufacturing PMI improved by 0.8 points to 58.2 which was the highest level seen since February 2011, while the services PMI increased by 0.9 points to 55.6.

The ECB Chief Mario Draghi said that real economic activity could complicate price monitoring. Visiting Dublin Trinity College, he admitted that price stability in the Eurozone has not been achieved yet as inflation remains subdued below the central bank's 2% target. Other ECB speakers could not provide support to the euro either, with the ECB Vice President Benoit Coeure claiming that the increasing usage of the euro by the Balkan countries may "put the economy at risk due to exchange rate shifts". A few hours later, Vitor Constancio, an executive member at the ECB said that the weak correlation between inflation and real economic activity would complicate price monitoring.

Next up, the markets will focus on the outcome of the German federal elections on Sunday where traders anticipate a victory for the Chancellor Angela Merkel. If results follow expectations, then Merkel will be in power for the fourth consecutive term.

Meanwhile, in Florence, the UK Prime Minister, Theresa May was delivering her landmark speech on her plans for the country's exit from the EU. During her public appearance, May proposed a two-year transition period while she also said that the UK will respect its budget commitments made throughout its EU membership. Moreover, she argued that Britain would do better if an agreement similar to that of the European Economic Area membership or to the free trade deal made recently with Canada would emerge.

Nevertheless, the pound failed to find support on May's remarks as the currency slumped by 0.70% to a session low of $1.3487 after a report from the Telegraph newspaper spread fears that May would raise the potential of leaving the block before March 2019. Though, in a QA session, May said that Britain would exit the EU at the end of March 2019.

In Canada, headline inflation missed expectations in August with the CPI rising by 1.4% y/y (0.1% m/m), below the 1.5% forecasted (0.2% m/m) after it rose by 1.2% in July. The core equivalent measure remained steady at 0.9% y/y (0.0% m/m vs -0.1% m/m in July). Regarding July's retail sales, those came in higher than projected, increasing by 0.4% m/m, while analysts anticipated the figure to stay flat at June's reading of 0.1%. However, excluding automobiles, household spending fell short of expectations, growing by 0.2% m/m, below the forecast of 0.4%.

In response to the data, the loonie posted moderate gains, with dollar/loonie edging down to 1.2307. Rising oil prices during the session also gave some support to the currency.

Dollar/kiwi was up by 0.34% on the day ahead of the general elections in New Zealand on Saturday.

Looking at energy markets, oil prices moved up while OPEC members Kuwait, Venezuela and Algeria as well as Russia and Oman who are not members of the organization were gathering in Vienna to discuss on possible supply reductions beyond March of next year. While in Vienna, oil ministers signaled the potential to extend the agreement well into 2018 with the Kuwait Minister who was chairing saying that since July's meeting the oil market has "markedly improved". Moreover, the Russian Minister mentioned that exports, which are not restricted so far, would also gather attention but the focus would be mostly on production levels. Though, some OPEC sources claimed that any suggestions on extensions are less likely to be made at the end of the meeting with the committee probably making recommendations in November when a wider group of OPEC and non-OPEC oil producers will meet.

The US Baker Hughes Oil Rig Count will be released at 1700 GMT. Also, Dallas Fed President and FOMC voting member Robert Kaplan is scheduled to participate in a Q&A session at the Conference titled "Global Oil Supply & Demand: Prospects for Greater Balance" in Dallas at 1730 GMT.

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